You can explore different ways to make passive income to see which methods work better for you. For example, you could make income from dividend stock investing, real estate investing (including real estate investment trust (REIT) investing), blogging, etc. There’s no free lunch, though. Active work must be involved — likely more of it in the beginning.
Making “passive” income is a long-term game. The idea is to accumulate assets that can generate growing passive income for you.
Earning passive income from dividend stocks
Canadians can build a diversified portfolio of dividend stocks for growing passive income one stock at a time. The dividend stocks are your income-generating assets. You can expand your portfolio by saving a portion of your paycheque to invest in dividend stocks. The active work required is identifying quality businesses and investing the underlying stocks at good valuations to help boost income generation, improve overall returns, and reduce risk. You’ll also need to manage the portfolio as the underlying businesses or the macro environment change.
In the case of dividend stocks that you plan for passive income generation, your priority may revolve around its earnings quality and payout ratio sustainability.
For instance, Fortis (TSX:FTS) has reported fairly resilient adjusted earnings through economic cycles. The company consists of 10 regulated electric or gas utilities in different jurisdictions. It primarily owns transmission and distribution assets that provide essential services to its customers. Additionally, its payout ratio is sustainable at about 74% of adjusted earnings.
Furthermore, the utility stock has increased its dividend for about 49 consecutive years. It is committed to continue increasing its dividend by 4-6% per year through 2028. At $54.64 per share at writing, the stock yields 4.3% and is fairly priced. Higher interest rates have weighed on Fortis stock, as utilities typically have large debt levels on their balance sheets. Long-term investors should get total returns of north of 8% per year.
Real estate investing
Real estate owners can rent out a room or property to generate “passive” income. The income may not be as passive as you think, though. As the CMHC website states, “Landlords must maintain the tenant’s home in a good state of repair and fit for habitation and at the landlord’s expense comply with health, safety, housing and maintenance standards.”
Of course, if homeowners want the income to be more passive, they could hire real estate management companies to maintain the real estate at an additional expense. This type of real estate investing generally requires the use of debt because real estate investing means large investments, which also means there will be concentration risk.
Real estate investment trust (REITs investing is another passive option for Canadians to invest in real estate. Canadians can buy REITs, which trade like stocks for a passive-income stream, much like managing a dividend portfolio, and they can sell the investment opportunistically for price gains. REITs are typically much more diversified than landlords owning properties. Plus, investors can choose the industries to invest in to balance risk. As we saw recently, REITs are also exposed to the risk of changing interest rates because they also typically have large mortgages.
Blogging
Some people have built a successful career from blogging. Just like everything else, it requires a lot of work to get the gig running. Blogging requires consistent writing and publishing informative work and fresh content — ideally every day. Your blog and every blog post you publish are your assets. Hopefully, you would increase the traffic to your blog over time to be able to earn decent ad revenue. Unfortunately, that wouldn’t truly be passive income, because you’d be writing new blog content periodically. Of course, you can also build a team of writers, but your operating costs will also increase.
